Effects of Falling Australian House Prices on the Australian Economy Theory 2022

Running head: AUSTRALIAN FALLING HOUSE PRICES
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“The effects of falling Australian house prices on the Australian economy”
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Introduction
For the last one and a half years, a dramatic fall in the Australian house prices been
witnessed. According to the “Australian Bureau of Statistics Residential Property Price Indexes
2018 December”, the Australian house prices dropped by 4.8% on an annual basis with Sydney
and Melbourne recording the highest falling percentages of -8.9% and -7% respectively. The
major reason behind the sharp decline in the Australian house prices was the tightened lending
standards by the “Australian Prudential Regulation Authority (APRA)” following the “Royal
Commission into Misconduct in the Banking, Superannuation and Financial Services Industry”.
This was after the Commission discovered irresponsibility in lending practices and fraud in
mortgages which were also termed as “subprime liar loans”. Since the early months of 2017, the
house prices have been in the fall.
In this essay, a discussion of the Australian falling prices and their effects on the
Australian economy as a major concern for everyone has been done. Policies have also been
suggested on what can be done by the Australian government and the Reserve Bank of Australia
to rectify the problem and an assessment of the success of the policies done.
Economic Theory of Housing Market
Housing market refers to a general market of houses being bought or sold by the buyers
or sellers respectively (Xiao, 2012). Buyers may either purchase houses directly from their
owners or indirectly through the brokers. It is really tough to predict the future of the housing
market since it is determined by so many factors.
The housing market just like any other market is subject to demand and supply. The
economic theory of markets seeks to explain the housing price and the house demand and supply

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and predict future outcomes in the housing market. The housing market consists of the users,
owners, renters, developers, renovators and facilitators (Muth, 2017). Users, renters and owners
constitute demand while the renovators and developers constitute supply.
The unique characteristics of properties include durability, heterogeneity, high costs of
transaction, long-time delays, investment as well as consumption good and immobility
(Henderson, 2014).
The demand in the housing market can generally be attributed to demographic factors but
also other factors such as consumer income, housing pricing, and credit availability among
others play a vital role (Summers, 2015). For instance, population growth in an economy is
associated with high demand for housing. Housing pricing and credit availability are determined
by the prevailing interest rates in an economy. When interest rates are low, consumers are likely
to purchase more property using the borrowed funds since they will repay with low-interest rates
which are not a burden to them (Wood & Ong, 2017). The reverse is expected when interest rates
are high. When the economy is strong or rather growing positively, consumers are likely to have
more income for consumption and therefore they may increase their demand for housing by
purchasing more property. High house prices discourage housing purchase for consumers
decreasing demand in the housing market while low house prices encourage consumers to
purchase new property and this increases demand in the housing market.
The supply in the housing market is done by the developers and the renovators who use,
labour, land and other factor inputs such as building materials and electricity to produce new
property. The supply of housing depends on the cost of the above factor inputs, production
technology, population growth and other factors such as natural disasters. Population growth,

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favourable costs of the factor inputs, improved production technology and absence of natural
disasters spur supply in the housing market and vice versa. Oversupply drives house prices
downwards while low supply drives house prices upwards due to bidding wars.
“Possible factors that cause a decline in house prices”
“Economic recession and unemployment”: The level of consumer income is a crucial
determinant factor for the demand for housing. When an economy is at recession or experiencing
a downfall, consumers have less income. Others even end up losing their jobs increasing the
level of unemployment in the economy. The phobia of unemployment also may discourage
people from entering the housing market. The low consumer income and increased
unemployment during an economy’s recession phase make consumers unable to afford property.
This lowers the demand for housing and pushes house prices downwards (Glindro et al, 2011).
“High-interest rates”: When interest rates are high, the mortgage payments are high. As a
result, the demand for buying houses decreases since consumers would prefer renting rather than
buying. The decrease in demand in the housing market due to high-interest rates causes a fall in
house prices.
“Consumer confidence and future expectations about house prices”: Consumer
confidence determines the willingness of consumers taking a mortgage. If consumers lack
confidence about the future economic conditions, then they will definitely not buy a house and
this will lower the housing market demand causing house prices to fall. Similarly, if consumers
expect future house prices to fall, then they will end up deferring house buying. This will lower
housing demand and drive house prices downwards.